Uncertainty Prevails: Likely removal of concessions could impact renewable open access

Likely removal of concessions could impact renewable open access

Open access for renewable energy projects has not taken off, primarily due to the reluctance of discoms that stand to lose their highest paying customers. With capital costs for renewable energy plants declining, states are planning to remove the concessions and increase surcharges, leading to uncertainty about the future of open access. Industry experts discuss the status of the open access market, and the key challenges and solutions…

Discoms have mostly been against open access. What has been the experience of the solar open access market so far?

Balwant Joshi, Managing Director, Idam Infrastructure Advisory Pvt Ltd.

Balawant Joshi

Bilateral open access as a market instrument is in turmoil. It is facing an uphill task in view of the stiff resistance from distribution companies. For long-term open access (LTOA), the most difficult challenge is the uncertainty about future charges and grid losses. While loss compensation is relatively stable, frequent changes in the methodology for calculating open access charges have created significant uncertainty for project developers. These charges are subject to revision every year by the regulator, which leads to difficulties in assessing the financial viability of LTOA solar projects.

In most states, utilities lobby hard with the state electricity regulatory commissions (SERCs) to increase open access charges to cut out competition for their high-value consumers paying high industrial and commercial tariffs. Moreover, state governments’ use of Section 11 of the Electricity Act, 2003 to restrict power export using open access when there is a shortage, is an issue.

Further, in the recent past, several state regulators have announced an additional surcharge, aside from the cross-subsidy surcharge (CSS) payable by open access consumers, making bilateral open access transactions unviable. As a result, even though renewable power installation costs have gone down, we have not seen significant uptake in open access.

Amit Kumar, Partner, PwC India

Amit Kumar

The Electricity Act, 2003 had introduced the concept of open access to promote competition in the sector. Open access transactions have increased in recent years and a significant part now comes from renewable energy sources. This increase is largely driven by prices. Despite the increase in transactions, the experience with open access has been disappointing for large consumers. Discoms do not prefer a large number of open access consumers as they would lose out on profitable clients, generally industrial consumers. The states also block electricity inflow when they have excess generation, or electricity outflow when they have a shortfall in generation. Overall, the success of open access has been limited despite numerous attempts to facilitate it.

Nikita Das and Jatin Sarode

We are seeing an increasing trend of renewable energy projects being set up for open access-based sale of power. Reportedly, over 1 GW of new solar projects in Karnataka will opt for third-party open access, which is quite big. This could be due to the incentives for solar open access from the Karnataka Electricity Regulatory Commission, which were available for projects commissioned before March 2018.

How can the open access mechanism be made a win-win solution for both developers and discoms?

Balawant Joshi

For quite some time, the fixed cost obligation under Section 42(4) of the Electricity Act, 2003 has been a cause of concern for discoms. Applicability of additional surcharge in an increasing number of states also corroborates with this concern, which is mostly on account of the skewed tariff structure. When consumers move to open access, discoms not only lose cross-subsidy but also the rightful recovery of their fixed costs. An increase in the recovery of fixed costs should reduce discoms’ resistance to open access. Therefore, it will be a win-win situation if the tariff restructuring is associated with reduction/ removal of additional surcharge.

Amit Kumar

The open access market can only be successfully implemented when it is a win-win situation for both parties, that is, large consumers and discoms. In the current scenario, discoms’ interests are being sidelined. One of the major issues affecting the open access market is the comparatively low electricity tariff for the agricultural and domestic segment. This situation has led to higher CSS and hampered the success of the open access market.

In addition, frequent switching of open access consumers between the grid and the open market has become the nemesis for discoms. This opportunistic behaviour of consumers is driven by the availability of electricity at lower tariffs at one of the sources, that is, the open market or the state utility. Industrial consumers are maintaining contract demand, which is not quite reflective of the high fixed cost. Discoms face issues in power procurement planning and they are not able to reduce their power purchase cost. This attitude of industrial consumers will further lead to discoms’ unwillingness in supporting open access.

A combination of these issues of low tariffs, high cost of supply and poor procurement planning caused by frequent switching by consumers has led to revenue gaps, thus necessitating a high CSS. There is an urgent need to tackle these issues in order to make open access attractive for all stakeholders. Tariff rationalisation is the first step in this direction. In addition, consumers opting for open access should be allowed to completely buy from the supplier of their choice and not partially.

Nikita Das, Research Associate, Prayas (Energy Group)

Nikita Das and Jatin Sarode

At present, each time a discom loses a high-paying consumer due to migration to renewable open access, it is a loss-making proposition for the discom. This is because the existing level of CSS is generally not enough to fully compensate the discom for the loss in revenue due to sales migration. On top of this, if renewable energy open access has concessions and waivers in states, the loss in revenue could be even more pronounced.

Hence, firstly, concessions/waivers for renewable energy open access should be removed and discoms should be able to recover the CSS, additional surcharge and wheeling charges completely. Moreover, the CSS should be set at a level that does not deter competition through open access. There should be medium-term certainty of the CSS to encourage consumers to move towards medium-term open access (MTOA) and LTOA, instead of the current practice of short-term open access (STOA).

Jatin Sarode, Research Associate, Prayas (Energy Group)

CSS alone cannot fully compensate discoms for loss in revenue due to sales migration, especially considering rising consumer tariffs. Thus, some form of additional transitional support from the state and central governments is necessary. This support can be provided through subsidies or via cross-subsidy with the levy of duties on all grid-connected consumers including captive consumers, as has been suggested in the National Energy Policy. In the long run, discoms need to fundamentally rethink their business models to account for the large-scale sales migration likely to take place due to the increasing viability of alternative options. They should also strongly focus on reducing their average cost of supply through a variety of measures.

Any existing CSS concessions/waivers for renewable energy-based open access should be gradually removed. In any case, the economics of renewable energy-based open access are primarily being driven by reducing power purchase costs rather than concessional charges. A clear sunset clause in this regard from policy makers and regulators will make for a smoother transition to an era without concessions.

What are the major challenges in procuring renewable power through open access? What changes need to be made to overcome these?

Balawant Joshi

Given the falling prices of wind and solar power, renewable energy-based open access and captive options could pick up in the coming years. However, such open access transactions face challenges on two counts: lack of forecasting, scheduling and deviation settlement mechanisms (DSM) at the state level, and high open access charges due to lower plant load factors. Many state regulators are in the process of implementing forecasting, scheduling and DSM regulations. The next challenge would be to create an IT infrastructure that would assist state load despatch centres (SLDCs) in implementing these regulations. The regulators must force SLDCs to invest in the necessary IT infrastructure.

Amit Kumar

State governments play a major role in the success or failure of open access. The Central Electricity Regulatory Commission (CERC) should take a tough stance to ensure compliance by SLDCs in providing open access in the true spirit.

Higher CSS is another major issue. While the CSS varies across the states, it is quite high for many of the states. For example, the CSS increased from 54 paise in 2016-17 to Rs 1.31 in 2017-18 in Assam, in Bihar from Re 0.79 to Rs 1.79, and in Andhra Pradesh from Rs 1.61 to Rs 1.65.

Nikita Das and Jatin Sarode

There are several operational challenges in terms of delays in the issuance of no-objection certificates. Some of these operational issues can be dealt with through the implementation of a transparent application process as is envisioned with the National Open Access Registry (NOAR) and stringent monitoring by the SERCs. Like the NOAR, similar portals at the state level for intra-state open access transactions can aid in ensuring a robust and transparent application process.

Moreover, SLDCs play a critical role in operationalising open access and remain a weak link in the whole process. Truly independent and empowered SLDCs with adequate and effective measures for ring-fencing them from discoms are necessary for realising the full potential of open access.

Apart from these operational issues, open access seekers have to deal with uncertainty in regulatory charges, which limit planning for LTOA or MTOA options. We feel that CSS should be set at a level that does not deter competition through open access. At the same time, there should be medium-term certainty of the CSS charge to encourage consumers to move towards MTOA/LTOA instead of STOA.

Given that solar and wind tariffs are almost at par with thermal tariffs, should these be eligible for any special exemptions?

Balawant Joshi

The prices of wind and solar power tariffs have now fallen enough to be able to compete with thermal energy. If we take into account the environmental costs of thermal energy, wind and solar prices may be even lower. The ambitious target of 175 GW necessitates giving special exemptions to wind and solar projects.

However, it is not necessary to provide support to renewable energy projects in the form of subsidies and grants, but support is required in the form of favourable treatment for forecasting, scheduling and lower open access charges. Similarly, small distributed renewable projects/ rooftop solar projects require supportive net metering regulations.

Amit Kumar

For some states, solar and wind tariffs have fallen to the extent that exemptions in open access charges are not required to attract private sector investment, and should be removed. These are the states that have good solar and wind power project deployment owing to good renewable energy resources and government support. This step will be beneficial for the financial health of the discoms. However, these states should provide an enabling policy framework such as power banking facilities.

The states that are lagging behind in renewable deployment should continue open access exemption to increase private sector participation and corporate renewable procurement. States with insufficient renewable energy resources should continue with the exemption of open access charges in order to encourage interstate open access. For example, Haryana and Delhi have land constraints; hence they are expected to continue with open access charge exemption.

Nikita Das and Jatin Sarode

Currently, there are various concessions/waivers in open access charges for renewable energy. These are in the form of lower CSS, lower network charges and lower additional surcharge, depending on the state. These measures have contributed to promoting renewable energy open access. However, given the falling prices of renewable energy, especially wind and solar, such concessions are increasingly becoming unnecessary.

The costs not recovered through such concessions are either passed on to the non-open access consumers of the discoms, or become part of the discoms’ growing losses. If the state or the central government deems it necessary to promote renewable energy open access, such costs should ideally be compensated through subsidies by the appropriate government. However, it might be prudent to have a gradual withdrawal of the concessions/waivers for renewable energy open access over a two to three-year period rather than abruptly ending them. A clear signal and roadmap in this regard from the policymakers and regulators will give the industry and consumers time to plan for the coming years.

In light of the falling renewable energy tariffs and states beginning to take away open access exemption provisions, how do you see the segment shaping up in the future?

Balawant Joshi

Most of the renewable energy-rich states do provide exemptions/concessional treatment for renewable energy-based open access. Nevertheless, with renewable energy tariffs coming on par with thermal tariffs, such exemptions can be reduced or eliminated in the future. If recent bids are any indication (wherein solar and wind developers have not asked for viability gap funding), renewable technologies will do well without such concessional treatment. However, facilities such as forecasting/scheduling provisions, lower open access charges and banking provisions need to continue in order to take care of the intermittent nature of renewable energy.

Amit Kumar

Some states have exempted consumers from paying open access charges if they switch to renewable power suppliers. However, this will not be the case in the future. Renewable energy tariffs have plummeted to Rs 2.50-Rs 3 per kWh. Therefore, the landed tariff for an open access consumer is close to the grid tariff in many states. Karnataka has already set a deadline for waiving open access charges and we expect that other states will follow once renewable energy tariffs become competitive enough.

Nonetheless, some states that are lagging behind in renewable energy deployment due to constraints will continue to provide exemption in open access charges.

Nikita Das and Jatin Sarode

The falling renewable energy prices are likely to increase open access-based renewable energy procurement. However, this can be sustainable only if the open access is for the medium to long term and without any concessions/waivers for renewables. Finally, strengthening of the SLDCs and removing operational/procedural difficulties would also be important for sustained growth.